Mutual Funds

Must distribute most of the earnings to unit holders (interest, dividends, net realized capital gains, net unrealized capital gains)


  • investors who share a mutual investment objectives pool their money
  • professional fund managers buy/sell securities for the fund's portfolio
  • open-ended: sells new units, buys back existing units —> liquid
  • unit holder may have voting rights in the funds held
  • Net Asset Value = (Net Assets - Liabilities)/(Number of Units Outstanding)
  • fund pledges to buy units for the Net Asset Value at the time of redemption
    • called the unit holder's right of withdrawal or redemption


  • clear investment objectives
  • professional management
  • economies of scale
  • diversification
  • small minimum investments
  • access to complex investments
  • liquidity
  • eligible for RRSPs, RRIFs, RESPs
  • choice of many funds and types of funds
  • easy to buy/sell


  • expenses: sales charges (loads), management fees
  • long-term time horizon (not for emergency cash)
  • liquidity
    • redemption of units can be suspended
    • payment of interest or dividends can be postponed
  • market risk
    • stock market down then market value of equity mutual funds down
    • bond market down then net asset value of bond mutual funds down



There are three fee structures

  1. no load
    • “level load”: trailer feed built into the total management fee
    • fees and charges spread evenly over life of contract
  2. frontend load
    • reduces the net investment (e.g., 4% of purchase amount means that only 96% is invested)
  3. backend load (no effect on daily performance; often declines and may disappear)
    1. redemption fee
      • e.g., 5% of original investment or redemption proceeds
    2. deferred sales charge
      • e.g., 4% in year 1, 3% in year 2,…, 0% in years 5+


Net Asset Value per Share = {(Fair Market Value of Total Assets) - (Fair Market Value of Total Liabilities)}/(number of shares issued)

  • usually calculated daily after market closes


  • returns (interest, dividends, or capital gains) are passed to unitholders
    • so no corporate tax to the fund company
  • annual taxation on the returns
  • interest credited monthly or quarterly
  • dividends credited quarterly, semiannually or on December 31
  • capital gains
    • from buying/selling by the fund managers or from buying/selling units
  • capital losses
    • remain with in the fund portfolio to offset capital gains → not passed on to unitholders
    • upon selling units, investors may receive capital losses
      • can apply against capital gains (but not against any other income)

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